Is an Annuity for You?

When Ken and Lori Heise start discussing the possibility of purchasing an annuity with a client, sometimes they have to start by dispelling a few myths. “Maybe I didn’t like a Chevrolet 30 years ago, but now it’s a whole different car,” Lori Heise says. “For some people, by closing their minds, they might be putting themselves in jeopardy when there could be a better solution.”

Ken Heise, who co-founded Heise Advisory Group with his wife, says that for many of their clients—most of whom are retired or about to retire—annuities are a good option for preserving their assets and generating income. “The No. 1 way to guarantee income for life is to use annuities,” he says, adding that many clients can be hesitant because of stories about “the old immediate annuities; they think you turn money over to an insurance company and never see it again. There are newer annuities that have come out in the last four to five years, and even the last 15 years. We refer to them as the new gold standard in income and cash-flow planning.”

But every situation is different, and Tom Thornton, VP and regional sales manager for BMO Harris Financial Advisors, says when choosing an annuity or any type of financial investment, first consider your growth needs, risk tolerance, time horizon and potential liquidity needs. “A financial adviser should make sure the customer fully understands what type of annuity it is, what its features are, and its limitations and costs,” he says. “There’s a great place for them and they’re wonderful tools, but they need to be applied in the right circumstances and situations.”

There are many types of annuities, which include: fixed deferred annuities, immediate annuities, index annuities and variable annuities. “In a broad sense, it’s a tax-deferred savings vehicle, a mechanism where an investor can put monies away for longer term growth,” Thornton says.

Generally, an immediate annuity customer would provide an insurance company with a lump sum of funds; and in return, would receive a stream of income for an agreed-upon amount of time. That could be for the life of the customer, or for five or 10 years, Thornton notes. An index annuity links the potential returns to a stock index, such as the S&P 500. A fixed annuity, meanwhile, gives a guaranteed return. “In general, it’s a very low return, and they’re also longer-term vehicles,” he says. “One thing to always be aware of is fees that could be associated with early withdrawal of funds.”

With a variable annuity, the customer and financial adviser can create a portfolio of investments within the annuity. “These are typically more growth vehicles, and they have a different cost structure,” Thornton adds.

Before making a recommendation about financial products, a good adviser will have a detailed discussion with the client about their situation. “Because we work with people who are retired or about to retire, the psychological shift is different,” Lori Heise says. “They have to move from accumulation to preservation and needing income from the money they’ve accumulated.”

Ken Heise says for retired clients, the first goal is often to make sure there is a guaranteed stream of predictable income for life. For more information about annuities, he recommends the site fixedannuityfacts.com.

Thornton ends with a caution that investment decisions should not be made lightly. “The take-home is, make sure you’re consulting with a reputable firm and a reputable adviser, that you’ve done your due diligence in terms of understanding the adviser and where they’re coming from. Make sure they’ve got your best interests at heart.”